Focused Funds and the Return of the Venture-Backed IPO

While I generally agree with Peter Rip in his comments about the over-capitalized venture business, and about the corresponding importance of having a coherent strategy for dealing with it, I think there is a huge confound set to happen in 2006/7. And it is … the return of the venture-backed IPO.

To set some context, here is the weekend Barron’s talking IPOs:

But startups so carefully incubated and nurtured by venture capitalists are conspicuously absent from the IPO market. Back in 2000, VC-backed deals accounted for almost 40% of the IPO dollar volume and 66% of the deals, according to Thomson Financial. In 2005, they comprised 10% of the volume and 22% of the deals — the lowest percentage of transactions in 16 years.

It’s only a matter of time before such deals resume their former importance in the calendar, says Richard Peterson, senior analyst at Thomson Financial, and author of the book Inside IPOs. “We’re in a reasonably stable IPO market that’s pricing deals very conservatively,” he says.By the estimate of San Francisco-based Thomas Weisel Partners, venture capitalists have financed some 11,500 businesses since 1995. About half of these deals still remain in their portfolios.

There have been a record low number of venture-backed IPOs the last few years, and many venture investors have begun extrapolating, pace Peter, to a world where that continues. I actually think — and this point is, in a contrarian way, reinforced by the above-cited Barron’s cover piece — that 2006 could see the return of the venture-backed IPO. The result, of course, would be a Perils of Pauline-style save for venture returns, one that will allow it to ignore demands for structural change for at least a few more years.

Yes, SarbOx is one of the reasons why there are fewer small-company IPOs, and most venture-backed companies would feel the SarbOx tax acutely. But that said, it is more an excuse than an explanation for the absence of venture-backed IPOs. Few venture guys would turn up their nose today at a Nasdaq IPO, SarbOx or no SarbOx.